PSD2: what is the new European directive on digital payments?

PSD2 may seem like an acronym dedicated only to those who do finance and is instead what has triggered the shift to open banking: a new way of banking that brings numerous advantages for end customers. In Italy, this new European directive on payment services, is officially operational from September 2019 and has brought a breath of fresh air with it to the world of payments and money management in general, made banks “open”, raised security standards and made the offer to customers more personalized and often more convenient. It is, therefore, useful to know more about this directive and to investigate the repercussions it has on the lives of citizens and businesses.

PSD2: what it actually is

The PSD that dateing  back to 2009 had some limitations and so PSD2 arrived: the second payment services directive that came into effect in the EU in 2016 and was implemented in the following years.

Through this legislation, the European Commission is forcing all banks on the continent to share the data they hold with fintech or financial services companies. For the end customer, this means they have more choice and can decide to entrust non-banks (the third parties) to manage their money and the payments they make. In fact, today the market is teeming with offers from sites and apps from authorized parties that allow you to pay with your bank account without actually using the bank. Users who feel skeptical of this measure and prefer to continue to give their data only to the bank, can do so by not giving permission to share and perhaps decide at a later date to do so. Vice versa those who immediately authorize and then change their mind can revoke the authorization from their Internet Banking at any time.

PSD2: objectives

The main goal of the introduction of PSD2 is to make the banking sector more democratic and less monopolized consequently, creating conditions in which competition is greater and innovation is encouraged. At the same time, the protection of customer data and the security of online payments is also enhanced. It is only thanks to PSD2 if today we can speak of Open Banking because with this directive the APIs of banks are made available to third parties who thus have the necessary elements to be able to build new services and new products that are competitive with those of banks and increasingly aimed at satisfying the needs of customers who have recently become very demanding. Banks no longer have a monopoly and must compete with many more players in the market. 

AISP, PISP and CISP: What they mean

With the coming into force of PSD2, three new types of players appear on the horizon, differing in their purpose and freedom of action.

• AISPs (Account Information Service Providers) provide services with access to the account information of bank customers, thus making it possible to analyze the spending behavior of a user and/or to aggregate data from various banks in a single platform.
• PISPs (Payment Initiatin Service Providers) provide services for withdrawing money and/or sending it to the user’s account as well as sending a payment if the user has given consent.
• CISPs (Card Issuing Service Providers) provide card-based payment services that allow you to check whether the amount required for the transaction to go through is available in a given account. The amount that is on the account is not revealed. The only revealed information is whether it is sufficient to make the payment transaction.

PSD2: what changes

We have understood so far that with PSD2 a flow of information is shared between banks and third parties: information that may concern the location of branches and the nature of certain banking products, but above all data on transactions. This means that another company can know how we manage our money, how we spend it, whether we borrow any, whether and how we pay our bills, whether we have a mortgage and are paying it off, and even how much we travel and on what budget. Banks “open” their databases full of interesting data to companies that are just waiting to use this data to create services and products that are competitive on the market, innovative and often very vertical and suitable for a precise category of target.

In addition to increasing competition in the provision of financial services, thanks to PSD2 and Open Banking:

• All accounts can be collected in one place, for example in an app where the user, with a simple glance at the dashboard, can observe their financial situation and also move money from one account to another easily and safely.
• Buying online is easier and cheaper and this gives a strong boost to e-commerce. Before buying  a product the retailer would contact the buyer who had to go through Visa or MasterCard to withdraw payment from the card, now this is no longer the case and the e-commerce site can access the account directly, if the cardholder has given permission.
• More accurate and secure credit scoring: in order to prove our creditworthiness and get a loan we have to show information about our financial condition. With PSD2 it is now possible to provide this data online allowing lenders one-time access to 12 months of income and expenses.

All of these data exchanges are done in the utmost security because they are done through which are trusted. Another important element is that startups that have access to data must always be approved by the financial services authority. In order to guarantee greater security to the client, it is necessary to point out that to use one of the many services of Open Banking, it is also absolutely not necessary to share a bank login and password with any other person.